Stock market’s 5-year rally hits milestone

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A board above the trading floor of the New York Stock Exchange showed Thursday’s record closing number for the Dow Jones industrial average.

By Peter EavisNew York Times
July 04, 2014

The stock market, continuing a remarkable ascent that began in the darkness of the last recession, surged past a milestone Thursday after a strong jobs report indicated that the economy might finally be gaining steam.

The Dow Jones industrial average, which measures the share price performance of 30 blue chip companies, broke through 17,000 for the first time, closing at 17,068.26. The Standard & Poor’s 500-stock index, a broader yardstick, finished the day within striking distance of 2,000, closing at 1,985.44, also a record.

The S&P 500 is nearly three times higher than its low point in 2009, when the economy was in free fall and the government was scrambling to shore up the financial system.

The stock market’s rally has taken place even as a tepid economy has failed to lift the incomes of many Americans. The economy unexpectedly shrank in the first quarter. Still, there are signs that economic growth is starting to pick up. The stock market records were set after the government announced Thursday that the economy had added 288,000 jobs in June, more than analysts had expected.

The unemployment rate — 6.1 percent — is now at its lowest level since the financial crisis struck with full force in the fall of 2008, according to the Associated Press.

“While the economy has been slower than people would have liked, there are signs that it has continued to improve,” Shep Perkins, a portfolio manager at the Putnam Global Equity Fund, said. “You could see the S&P at 3,000 in three to four years.”

The bull market has lasted nearly 64 months, making it the fourth longest since the crash of 1929, according to an analysis by S&P Dow Jones Indices. And in recent years, the US stock market has substantially outperformed those of Europe, Japan, and China.

‘The schism between haves and the have-nots has widened.’

Some individual investors have benefited from the rally. The value of stocks and mutual funds held by households increased more than $3 trillion in the 12 months through March, according to data from the Federal Reserve. But such gains have mostly gone to the wealthier households, where stock ownership is concentrated.

“The trickle down is not working,” said Douglas Kass of Seabreeze Partners Management, a hedge fund firm, “The schism between haves and the have-nots has widened.”

Stronger corporate profits have helped sustain the rally. Some companies have bolstered their bottom lines in part by restraining expenses. But investors seem most excited about younger companies with strong growth prospects. Stock in Facebook, for instance, has risen more than any other in the S&P 500 over the past 12 months, soaring 170 percent. Netflix is up 114 percent.

One of the most surprising features of the most recent bull market is that it has taken place during a drawn-out period of economic sluggishness. During the extended rallies of the 1990s and the 2000s, the economy grew at about 3 percent a year, double the growth rate during the latest ascent.

Not all investors are convinced that growth is poised to accelerate. The mood in the bond market, for instance, is circumspect. Yields on bonds have fallen this year, indicating that investors believe the Fed will have to keep interest rates low to prevent the economy from stalling.

The 10-year Treasury note closed Thursday with a yield of 2.65 percent, down from just more than 3 percent at the end of last year.

“This demonstrates that bond investors are skeptical about the economic recovery,” Timothy M. Ghriskey of Solaris Asset Management said. “And rightly so, because we saw a weak economy in the first quarter.”

The Fed has pumped more than $3 trillion into the economy and the banking system since the financial crisis. But some investors assert that this stimulus has helped generate speculation in the stock market while having a limited effect on the real economy.

“There has been no escape velocity in the economy,” Kass said. “We are dependent on the kindness of the Federal Reserve.”

As the economy recovers, the Fed is gradually injecting less money into the financial system. If profits and the economy grow robustly, stock market investors may not care that there is less monetary stimulus. But if the withdrawal causes a tightening in financial conditions, the appetite for stocks might dwindle.

One big question the skeptics have is whether the rally has made stocks overvalued, and potentially vulnerable to a decline. There are many different ways to assess how expensive stocks are, and bullish and bearish investors use different yardsticks to make their case.

Optimists, for instance, note that the stock market value of the companies in the S&P 500 is 16.5 times the 2014 profits that analysts expect for those firms. That ratio is not particularly high by historical standards, they say.

“Valuations are not extreme by any means,” Ghriskey said.

But the skeptical analysts contend that the stock market is trading at lofty valuations when using longer-term comparisons of earnings and stock prices, including a yardstick devised by Robert J. Shiller, a professor at Yale. This measure shows the stock market is trading close to the valuation it had before it plunged in 2008.

And Gerard Minack of Minack Advisors says he has noticed a particularly disquieting feature in the latest rally. During past peaks, even though some stocks were significantly overvalued, many others had attractive valuations. Now, he says, almost no companies in the S&P 500 are real bargains. “What is cheap is cheap for a very good reason,” Minack said. “Everything else is rich or fully valued.”